At its open meeting in mid-October, the Securities and Exchange Commission adopted liquidity rules for mutual funds and ETFs — called “sweeping” by Chairwoman Mary Jo White — to allow fund boards, the SEC and investors to “better monitor liquidity risks” in those investing vehicles.
In introducing the rules approved during the meeting on Oct. 13, White said they were meant to “modernize and enhance liquidity risk management” and improve reporting on fund holdings by registered investment companies for mutual funds and exchange-traded funds (ETFs).
White characterized the new rules as part of her nearly two-year-long effort to institute “a series of transformative reforms” meant to “enhance the SEC’s oversight and regulation of the asset management industry,” and for the commission to catch up with changes in that industry.
In a brief interview with CNBC following the SEC meeting, White said fund holdings in illiquid investments would be capped at 15% of the portfolio. She said the goal was to institute a “minimum requirement for highly liquid” holdings.
Specifically, funds will now be required to report their complete portfolio holdings to the SEC monthly using the new Form N-PORT, and annually using Form N-CEN. The “census-type information” in those forms will be provided in a “structured format immediately useful for analysis,” and will include information on the funds’ use of “derivatives, basic risk metrics, securities lending activities, liquidity and pricing of portfolio instruments.”
Each of the investments in a fund portfolio will be placed into one of four liquidity categories, “based on the number of days in which the fund’s investment would be convertible to cash in current market conditions without the sale significantly changing the market value.” In addition, every fund must designate a “minimum amount that the fund must invest in highly liquid investments convertible to cash within three business days without significantly changing the investment’s market value.” Finally, there is the requirement that illiquid assets will be limited to 15% or less of the fund’s net assets.
The SEC said the “controls around the accumulation of illiquid positions have been tightened,” promising increased oversight when a fund “dips below its highly liquid investment minimum or exceeds the limit on illiquid investments.”
Timothy Cameron, head of SIFMA’s Asset Management Group (AMG), said that while the industry group was still reviewing the final rules, it lauded the SEC for “showing thoughtful consideration of comments by SIFMA AMG and others.”
The Investment Company Institute was less complimentary, with ICI President and CEO Paul Schott Stevens releasing a statement noting that “this is a tough set of new rules that will spur a number of operational changes across the registered fund industry,” and will “likely add complexity and cost.”
The new rules for larger fund companies to start filing their N-PORT and N-CEN reports is June 1, 2018. For fund companies with less than $1 billion in net assets, the deadline to start filing those reports will be June 1, 2019.
Money Market Funds Ready but Wary
The day after the SEC adopted the new liquidity rules for mutual funds and ETFs, a 2014 rule regarding money market funds finally became effective.
While ICI says funds are ready to comply with the SEC’s new rules for money market funds that kicked in last month, the mutual fund industry trade group warned advisors and investors to tread carefully.